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UNITED STATES EX REL. GEDRICH v. GROUP HOSPITALIZA

September 8, 1998

UNITED STATES OF AMERICA ex rel. Steven M. Foust and Richard A. Gedrich, Plaintiffs,
v.
GROUP HOSPITALIZATION AND MEDICAL SERVICES, INC., d/b/a BLUE CROSS AND BLUE SHIELD OF THE NATIONAL CAPITAL AREA, et al., Defendants.



The opinion of the court was delivered by: JOHNSON

MEMORANDUM OPINION

 Former federal government auditors Steven M. Foust and Richard A. Gedrich bring this action under the qui tam provisions of the False Claims Act. This is an action for statutory civil penalties and damages arising out of alleged violations of 31 U.S.C. § 3729. All defendants have moved to dismiss Foust and Gedrich's second amended complaint and the United States has moved to dismiss Foust and Gedrich from this action.

 The False Claims Act allows a private plaintiff to make a claim on behalf of himself and the United States for violation of the Act. 31 U.S.C. § 3730(a). Such plaintiffs, including Foust and Gedrich, are called "relators." Qui tam relators are entitled to receive part of any government recovery when suit is brought. The government investigates the complaint to determine whether to intervene in the action; if it declines to do so, the private plaintiff, or relator, may proceed with the action alone. 31 U.S.C. § 3730(b)(4). In this case, after a lengthy investigation, the government elected to intervene in only part of the relators' case.

 In order for qui tam relators to proceed without the government's intervention, they must meet the jurisdictional requirements laid out in 31 U.S.C. § 3730(e). Here, the government has elected not to intervene in the claims that now constitute relators' second amended complaint. The Court finds that it lacks subject matter jurisdiction to hear relators' allegations and will grant defendants' motions to dismiss relators' complaint and the United States' motion to dismiss relators from this action. The portion of the case in which the government chose to intervene will remain before the Court.

 I. Background

 Relators originally filed their claims under seal on November 4, 1993, and their complaint remained under seal pursuant to 31 U.S.C. § 3730(b) while the government determined whether to intervene. On October 31, 1996, the government notified the Court that it was intervening in part and declining to intervene in part and the case was unsealed at that time.

 A. The Defendants

 Defendants in this case are Blue Cross Blue Shield of the National Capital Area ("BCBSNCA"), also known as Group Hospitalization and Medical Services, Inc., and several individual Blue Cross Blue Shield organizations. *fn1" The individual organizations are known as "participating plans" and BCBSNCA is known as the "control plan." The participating plans provide health insurance benefits to local individuals who subscribe to the plans. They also maintain national accounts for employers whose employees are located within the service areas of other individual Blue Cross Blue Shield plans. All participating plans' national accounts are administered by a control plan, BCBSNCA. BCBSNCA reimburses the participating plans for health benefits they pay out and other costs they incur in administering national accounts.

 Defendants BCBSNCA and the participating plans negotiate agreements with the institutional health care providers that serve the insured individuals who subscribe to defendants' insurance plans. Under these negotiated agreements, the participating plans reimburse the health care providers -- primarily hospitals, nursing homes, and home health care agencies -- for the medical services they render to the subscribers. The health care providers also agree to give the participating plans discounts, refunds, or rebates on those medical services. The participating plans receive these discounts, refunds, or rebates from the health care providers at or after the time the participating plans pay the health care providers for their services. Moreover, participating plans periodically receive other refunds and rebates from these health care providers when incorrect payments are corrected and when similar adjustments take place.

 B. The Relators' Allegations2

 In brief, relators allege that the participating plans failed to credit the government with the money they received from the health care providers and that BCBSNCA failed to collect this money from the participating plans for credit to the government. These allegations appear in two counts: one relating to the Federal Employees Health Benefits Program ("FEHBP") and the second relating to contracting government agencies, namely the Board of Governors of the Federal Reserve Board and the Smithsonian Institution.

 I. Count One: FEHBP

 BCBSNCA contracts with certain employee organization plans ("EOPs") under the FEHBP. EOPs are one type of health plan available to federal employees who are members of those groups and the participating plans provide health care benefits to members of the EOPs. BCBSNCA acts as the control plan, or the administrator, when health benefits are provided to EOP subscribers who live within the service area of the respective participating plans.

 The five EOPs at issue in this case are the National Treasury Employees Union, the National Alliance of Postal and Federal Employees, the Beneficial Association of Capital Employees, the National Association of Postmasters of the United States, and the United States Secret Service Employee Health Association. At the time relevant to relators' claims, these EOPs were administered by BCBSNCA, which underwrites and administers claims submitted by these EOPs to participating local plans nationwide.

 Under the statute and regulations governing the FEHBP, BCBSNCA and the participating plans may charge the government only for the actual costs they incur in providing health benefits. "Actual costs" are defined as the costs of health benefits provided less applicable refunds, rebates, allowances, and credits. 48 C.F.R. § 1652.216-71(b)(2)(i). Relators contend that the participating plans failed to credit or refund to FEHBP the provider discounts, refunds, and rebates they received for services rendered to members of the five EOPs at issue. Relators further claim that the participating plans breached their duty to pass on to BCBSNCA, for credit to the FEHBP, the discounts, refunds, and rebates the plans secured, thereby fraudulently overcharging the government. Therefore, relators aver, defendant participating plans have made false claims to the government within the meaning of 31 U.S.C. § 3729.

 Relators allege that BCBSNCA has also fraudulently overcharged the government by abdicating its duty to collect discounts, refunds, and rebates from the participating plans and to credit them to the FEHBP. On the basis of this additional allegation, relators charge that defendant BCBSNCA has made false claims to the government within the meaning of 31 U.S.C. § 3729.

 2. Count Two: Contracting Government Agencies

 BCBSNCA has contracted with government agencies to provide health insurance benefits and the participating plans provide those benefits to employees of the government agencies. The agencies at issue are the Board of Governors of the Federal Reserve Board ("Federal Reserve") and the Smithsonian Institution. First, relators allege that BCBSNCA overcharged the government for covered benefits by failing to credit or refund to the Federal Reserve and the Smithsonian Institution applicable discounts, refunds, and rebates it received on behalf of employees of those agencies. Second, relators allege that BCBSNCA overcharged the government by failing to collect applicable discounts, refunds, and rebates from participating plans that were attributable to the named government agencies. Third, relators claim that participating plans overcharged the government by failing to credit or refund to BCBSNCA or to the agencies discounts, refunds, and rebates they received from health care providers that were attributable to employees of the named agencies. On the basis of these allegations, relators claim that defendants BCBSNCA and the participating plans made false claims to the government within the meaning of 31 U.S.C. § 3729 when they failed to pass on those discounts, refunds, and rebates attributable to employees of the Federal Reserve and the Smithsonian Institution.

 C. Relators

 Relators in this matter are former federal government auditors. Relator Richard Gedrich began work with the Office of Personnel Management ("OPM") in April 1980 as an auditor in the Insurance Audit Division of the Office of Inspector General. The Blue Cross Blue Shield Branch of the Insurance Audit Division audits those insurance plans that have a license to use the Blue Cross and Blue Shield trademark. Gedrich was assigned primarily to the Blue Cross Blue Shield Branch until his resignation in March 1987. Relator Stephen Foust joined OPM in October 1983 as an auditor in the Insurance Audit Division of the Office of Inspector General, also assigned primarily to Blue Cross Blue Shield Branch audits. He resigned in August 1987.

 Both relators joined the same audit firm after leaving OPM. In late 1986 and 1987, this audit firm was awarded two contracts by OPM to perform audits on OPM's behalf. Relators performed six Service Benefit Plan audits for OPM pursuant to these two contracts. Work orders issued under these contracts required the firm to "substantiate that amounts" charged to the government- funded plans were "net of applicable refunds, credits, and income." The firm was directed to advise OPM's representative if it suspected fraud by the plans. The Comptroller General's Standards, binding on the firm, required the auditors to report suspected fraud in writing to OPM.

 On February 10, 1992, Foust rejoined the OPM Office of Inspector General as a temporary employee and OPM planned to hire Gedrich on that basis as well. The OPM Office of Inspector General audits the EOPs and its Employee Organization Branch audits the final accounting statements that BCBSNCA submits for each EOP with which it contracts. Relator Foust was assigned to this branch from February 1992 to March 1992. On March 13, 1992, Foust's employment was terminated effective March 20 because of conflict of interest concerns about his outside consulting business. Gedrich was never rehired by OPM.

 In December 1992, relators submitted an unsolicited written proposal to the National Alliance of Postal and Federal Employees ("Alliance") requesting that they be hired to conduct an audit of BCBSNCA's handling of Alliance's health benefits plan. BCBSNCA Ex. E at P 5. On January 21, 1993, relators met with Larry Lindsey, Alliance's Insurance Director, to discuss this proposal and represented to Lindsey that they had gained substantial experience auditing Blue Cross Blue Shield plans through their work in the government. Alliance ultimately did not retain relators.

 Relators entered into a contract with the FDIC in April 1993 to audit BCBSNCA. Their contract with the FDIC precluded them from using any information in the performance of the contract for any purpose other than the performance of the contract and precluded disclosure of such information to anyone outside the FDIC. During the FDIC audit, BCBSNCA gave relators access to information about the pass-through of discounts from BCBSNCA and the participating plans to the FDIC, unions, and agency accounts.

 II. Discussion

 Defendants and the United States all claim that this Court lacks subject matter jurisdiction over the relators' second amended complaint because the relators' allegations are based on similar transactions that were "publicly disclosed" before the relators filed their original complaint and because the relators are not an "original source." See 31 U.S.C. § 3730(e)(4)(A). In the alternative, defendants seek to have the relators' second amended complaint dismissed on the ground that it fails to state allegations of fraud with sufficient particularity. See Fed. R. Civ. P. 9(b).

 There are several motions to dismiss the relators from this action. Defendant participating plans, defendant BCBSNCA, and defendant Empire Blue Cross (one of the participating plans) have each filed motions to dismiss relators' second amended complaint. Defendant BCBSNCA has filed a motion to dismiss relators' first amended complaint and the United States has moved to dismiss the relators from this action. Because these motions raise similar arguments, the Court will consider them together.

 A. Subject Matter Jurisdiction

 Defendants and the United States argue that this Court lacks subject matter jurisdiction over relators' claims because the allegations of relators' second amended complaint are based on substantially similar transactions that had been "publicly disclosed" before the relators filed their original complaint and because the relators are not an "original source" of the information on which the publicly disclosed allegations are based. See United States ex rel. Findley v. FPC-Boron Employees' Club, 105 F.3d 675, 690 (D.C. Cir.), cert. denied, 139 L. Ed. 2d 114, 118 S. Ct. 172 (1997). The False Claims Act provides that:

 
No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless . . . the person bringing the action is an original source of the information.

 31 U.S.C. § 3730(e)(4)(A). The statute goes on to define "original source" as "an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information." 31 U.S.C. § 3730(e)(4)(B).

 The Court's analysis must progress as follows:

 
First, the reviewing court must ascertain whether the "allegations or transactions" upon which the suit is based were "publicly disclosed" in a "criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit or investigation, or from the news media." 31 U.S.C. § 3730(e)(4)(A). If-- and only if-- the answer to the first question is affirmative, will the court then proceed to the "original source" inquiry, under which it asks if the qui tam ...

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